The Birth of Carbon Pricing and Delivering California's First 'Climate Dividend'

12/05/2012 10:11 am ETUpdated
May 14, 2013

If carbon pricing in the United States were a baby, it would have been born on November 14, 2012, when the California Air Resources Board (ARB) launched its first auction of Cap and Trade greenhouse gas permits under the state's AB32 climate law. The happy parents were Mary Nichols, the ARB Board Chair, and Governor Jerry Brown. Former Governor Arnold Schwarzenegger was present at the conception in 2006 but has since moved on (why does that sound familiar?). The baby's vital statistics: 23.1 million permits were sold at the clearing price of $10.09 (illustrating how important the $10/ton price floor was), and $290 million was raised. During the past six years of gestation, ARB withstood pressure and lawsuits from various disgruntled industry groups and environmental groups, including a failed statewide initiative attempt to repeal it.

The ARB's birth plan for its first auction was not easy. Industrial emitters received about 90% free allowances, with the remaining 10 percent to be auctioned. In the electricity sector, investor owned utilities are to be provided free emissions, but they must "consign" those emissions to generators for purchase. Then the utilities would use the funds received "...exclusively for the benefit of retail ratepayers of each such electrical distribution utility, consistent with the goals of AB 32."

The California Public Utilities Commission (CPUC) recently released a proposed decision about how to do this.

The CPUC favors using all funds for rebates, rather than devoting some funds to renewable energy or efficiency investments and programs. In returning 100 percent of funds back to ratepayers and forgoing investments, the CPUC notes that these funds come from ratepayers, and do not represent "free money" with which to create new programs.

The CPUC also considers who should receive rebates, and whether all users should receive equal rebates or should larger energy users receive larger ("volumetric") rebates? Volumetric rebates dilute the carbon price signal and reduce the incentive for conservation. On the other hand, the existing "tiered" electricity rate structure already imposes higher costs on larger users, and state laws have frozen lower-tier rates. The CPUC stated that in a perfect world it would prefer equal per household rebates, but given existing unequal rate structures, they are including volumetric aspects in rebates to industries who might be tempted to move out of state to avoid the GHG costs, to small businesses in 2013-2014, and to reimburse residential customers for the portion of costs directly associated with the Cap and Trade program. For price signal purists, that's the bad news, but then it gets better. The remaining revenues would be distributed non-volumetrically, equally on a per residential account basis. The CPUC calls that remaining amount the "climate dividend."

This is a huge precedent, which came about because the CPUC understands the arguments for equal dividends from the Commons. The CPUC lists one of its priorities is to "Distribute Revenues Equitably Recognizing the Public Asset Nature of the Atmospheric Carbon Sink." The CPUC's proposed decision states that:

The equitable distribution of revenues recognizing the "public asset" nature of the atmospheric carbon sink refers to... the idea that the atmosphere is a commons to which all individuals have an equal claim...Returning revenues equally to all residential customers is more equitable and comports with the idea of common ownership of the atmosphere given that residential ratepayers will ultimately bear the increased costs as a result of the Cap and Trade program.

Until now, the Alaska Permanent Fund was the prime example of a common resource returned to all citizens equally. The northeastern states' RGGI program chose to invest most of its auction proceeds into efficiency programs, and although several states were tempted to divert revenues to back-fill state budgets, there were some customer rebates on electricity bills. California's choice to prioritize a climate dividend for its electricity sector emissions is a breakthrough for a new type of economics based on the shared wealth of the Commons. The climate dividend can be cited when the ARB seeks ideas for distributing additional AB32 revenues, and it could influence other states or future national climate legislation.

The Birth Announcement

But first the CPUC has to figure out how to deliver the dividend to consumers. Though not as interesting philosophically, the method of delivery matters. If carbon pricing is the baby, then the climate dividend is the birth announcement. The visibility of the price signal and the resulting psychology are perhaps just as important as the dollars and cents involved, at least at first. Changing complex purchasing habits takes time, and the electorate's feelings in the interim could be the difference between the program's success and a backlash or even repeal.

The CPUC is considering two options for delivery of the dividend: on-bill and off-bill. The off-bill approach might be compared to receiving a birth announcement in a hand addressed envelope in the mail. The personal touch makes a difference, and often such announcements go up on the fridge and become a conversation piece in the family for weeks. On-bill is like seeing a birth announcement in the local newspaper. It's a little impersonal, and well, it takes a special effort to get interested in a line item on a utility bill, even if it is the most exciting thing since net-metering.

Utilities prefer the newspaper (on-bill) approach. It is cheaper, and they are worried that the off-bill approach will result in many people losing the dividend checks or failing to cash them, and that costly accounting would eat into the millions of dollars that should be going to ratepayers.

But those risks may be countered in any number of ways. The CPUC lists off-bill methods such as a physical check sent to each customer, a direct deposit into a customer's bank account, or a credit on an electronic benefit card. The benefit card could provide utilities or the State flexibility to offer incentives to customers to spend unused funds on energy efficiency products. The CPUC could backstop the climate dividend to make sure it is used by allowing unused funds to roll over into other accounts after a certain length of time. For dividend supporters, getting consumers used to a debit card that receives funds from the Commons would be a big step forward, and could be expanded to include transportation sector revenues or income from other common assets.

The choice is between a simple, transparent, flexible delivery method, or an almost invisible and likely unappreciated one. Remember how much people liked receiving checks from the Bush tax cuts, but how Obama received very little political credit for the stimulus bill's payroll tax cuts? Even if administering an off-bill delivery turns out to be more expensive than on-bill, the added attention provides needed advertising for the program.

Considering the complexities and interests involved in the rulemaking, it is impressive how far they have come. The next step is to bring the newborn home from the hospital.